Will Crowdfunding Democratize Investments?

One skeptic says it still favors the 1 percent.

The state Department of Financial Institutions recently issued a warning about crowdfunding—a way of raising money on the Internet that's already proved a boon for artists through popular Kickstarter, and which was green-lighted for the business world through the just-passed JOBS Act. Turns out state officials aren't the only skeptics.

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The Seattle Angel Conference, an organization that brings together entrepreneurs and wealthy "angel" investors," held a workshop May 21 to discuss the new phenomenon. In interviews with Seattle Weekly, both the workshop's facilitators suggest that crowdfunding may not live up to expectations.

As facilitator and lawyer William Carleton explains, crowdfunding—in theory—is supposed to democratize the investment process. Until now, companies could raise money two ways. They could hold a public offering, a complicated and highly regulated process that costs millions of dollars in lawyers' fees alone, or they could bypass the regulations by raising money from millionaire or "angel" investors.

The idea of this bizarre regulatory exemption—literally requiring these informal investors to have a net worth of at least a million dollars—is that "rich people are sophisticated investors who can fend for themselves," Carleton says. But he recognizes that "in terms of Occupy Wall Street," many would say that "the whole thing has been rigged for the 1 percent."

With crowdfunding, the 99 percent will now be able to get in on the action outside of a formal public offering. Or at least they will when the feds establish new regulations for this type of fundraising, a process likely to take the better part of a year. As DFI stressed last week, entrepreneurial crowdfunding will not be legal until that happens.

Even though it's becoming legal, DFI made crowdfunding sound pretty scary, citing possible scams, the high risk of investing in small businesses, and the inexperience of the entrepreneurs who run them.

Carleton, however, says "overblown" fears have led the feds to "suffocate" crowdfunding with complicated rules. The deals must be done through regulated Web portals, for instance, although no such portals are required for investments by rich folks.

John Myer, another lawyer and fellow facilitator of the Angel Conference workshop, similarly observes that the JOBS Act requires crowdfunding companies to hire an accountant. Yet, he says, "the whole point was that there were to be no lawyers and no accountants."

Entrepreneurs, moreover, aren't allowed to advertise their online offerings to the crowd. At the same time, the JOBS Act lifted a regulation that had previously stopped companies from advertising to millionaires. Both Myer and Carleton say the latter provision may be the bigger deal, enabling entrepreneurs to reach a wider circle of rich people, who will consequently have better access than ever to barely regulated investment opportunities.